Pursuant to Elections Code Section 9005, we have
reviewed the proposed initiative related to state taxes and student fees
(A.G. File No. 07‑0084).

Background

State Income Tax. Under current
law, the state taxes income above $1 million at a rate of 10.3 percent.
This rate was raised from 9.3 percent in 2004 as a result of an
initiative that added a 1 percent surcharge for this income bracket. The
1 percent surcharge funds county mental health programs.

Student Fees. The state maintains
two public university systems: the University of California (UC) and the
California State University (CSU). While the state provides funding to
the universities for most of the cost of educating their students, the
students pay a portion of these costs through education fees (often
called “tuition” in other states).

Under existing law, UC’s Board of Regents and
CSU’s Board of Trustees set the fees that are paid by their respective
students. State law provides no formula or specific guideline for the
governing boards to use in setting annual fees. Actual fee levels for
undergraduate students have varied considerably in recent years. In some
years, fees have increased by as much as 40 percent, while in other
years they have remained unchanged and in several years they have
actually declined. For 2007‑08, UC and CSU’s resident undergraduate fees
are $6,636 and $2,772, respectively.

Proposal

Income Tax Increase. This proposal
adds—beginning in 2009—a new 1 percent surcharge on personal income
above $1 million. This would establish a top state income tax bracket of
11.3 percent. It directs 60 percent of the new income tax revenues to
the two university systems for undergraduate education. This funding
would be split between UC and CSU in proportion to their relative fee
totals in 2006‑07—about 55 percent for UC and 45 percent for CSU.
However, if UC were not to adopt the measure’s fee restrictions (see
below), CSU would receive all of the new funding available for
undergraduate programs. The measure does not formally restrict the
remaining 40 percent to any specific state purpose. However, because of
existing law, the collection of new tax revenue would increase the
state’s annual minimum spending requirement for K-14 education (K-12
schools and California Community Colleges).

Student Fee Freeze. This proposal
freezes CSU resident undergraduate fees at their 2008‑09 level for five
years. After that period, the proposal would limit subsequent fee
increases to no more than the annual percentage change in the California
Consumer Price Index. The same fee freeze and subsequent annual fee
increase limits would only apply to UC if the Regents adopted them by
resolution. This is because the UC Board of Regents, unlike the CSU
Trustees, derives its authority from the State Constitution, rather than
statute. The Regents’ authority to set fee levels cannot be reduced
through an initiative statute such as this one.

Fiscal Effects

Impact of the Tax Provision. The
1 percent income tax surcharge would generate about $2 billion a year
(with the first full-year effect starting in 2009‑10). The two
university systems together would receive 60 percent of this new
revenue, or roughly $1.2 billion each year. The remaining 40 percent
would be available for general state purposes. We estimate that this
general purpose funding would be sufficient to cover the increased K-14
spending obligations, described above.

Impact of the Student Fee Revenue
Provisions. The fiscal impact of the fee freeze would depend on
what otherwise would happen to UC and CSU fee levels. For example, if
fees were assumed to grow by 10 percent annually in the absence of this
measure, then the fee freeze would lower annual fee revenue by about
$250 million in the first year, growing to about $1.4 billion in the
fifth year.

Summary of Fiscal Effects

This proposal would have the following major
fiscal effects:

Annual increase in state revenues of roughly
$2 billion from a new 1 percent tax on high-income individuals. Of
these new revenues, 60 percent would be allocated to undergraduate
education at the state’s public universities and the remaining
40 percent likely would be spent on K-14 education.

Reduction in public university undergraduate
fee revenues (primarily from a five-year freeze on fee levels),
potentially exceeding $1 billion by the end of the freeze period.